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HOTEL LEELA VENTURE
Disappointing numbers; stress test from Q1FY12
Impressive jump in ARRs
Hotel Leela Venture’s (HLV) Q3FY11 sales jumped 11.4% Y-o-Y and 34.7% Q-o-Q,
to INR 1.42 bn, driven by 13% Y-o-Y and 35% Q-o-Q growth in ARRs, to INR
11,149 in Q3FY11 The company reported 69.7% ORs versus 69.2% in Q3FY10
and 61.6% in Q2FY11. Growth in HLV’s ARRs is amongst the best among all hotel
companies in India, this quarter. The Delhi property opening has now been
postponed to Q1FY12 against the previous expectation of Q4FY11.
EBIDTA margins improved; PAT affected due to high interest
EBIDTA margin improved Q-o-Q by 1600bps due to high operating leverage (35%
sequential increase in ARRs). Y-o-Y, EBIDTA margins were flat. We expect EBIDTA
margin to improve to 33.7% in FY11E against 29% in FY10. Owing to the
conversion of FCCB debt into Indian currency debt in H1FY11, interest costs
increased 322% Y-o-Y and 33% Q-o-Q. As a result, the company reported PAT
margins of 15% against 23% in Q3FY10. With the expected opening of Delhi
property in Q1FY12, we expect the P&L to come under severe pressure as
depreciation and interest on the INR 17 bn capex on the Delhi property starts
reflecting Q1FY12 onwards.
Due to the shifting of Delhi property to Q1FY12 than our earlier estimates of
Q4FY11, we are reducing our FY11E sales estimates by 10% and EBIDTA
estimates by 22%. But due to the shifting of interest charges to FY12, we increase
our PAT estimates for FY11E by 40%. Due to the higher than expected capex for
the Delhi property and the subsequent increased debt, we are also reducing our
FY12E PAT by 30-35%. But as all the changes are happening below the operating
profit, our valuations remain intact for the company.
Outlook and valuations: Expensive on all counts; maintain ‘REDUCE’
With the substantial rise in debt due to the ongoing capex and redemption of
FCCB debt, we expect the company to raise either equity or sell the office space in
Chennai in some time. We expect the company’s interest liability to rise
substantially from Q1FY12 as interest and depreciation charges of the Delhi
property (INR 17 bn) start hitting the P&L. With the FY11E D/E of 4.4x, we believe
that the company’s balance sheet is severely stretched. We continue to value HLV
based on EV/EBIDTA and maintain our target price of INR 25. At CMP of INR 38.7,
the stock is trading at 32.6x and 17.2x EV/EBIDTA of FY11E and
Company Description
Hotel Leela Venture (HLV), a chain of luxury resorts and business hotels, operates 1,617
rooms across six locations in India. Five properties with 1,205 rooms are owned by the
company and 409 rooms are under the management contract. Compared with other
hotel chains in India, HLV is small, but has presence across prominent cities where it
operates.
HLV has a marketing alliance with Kempinski for its properties in India. The company
caters to both business and leisure travelers. In 2009, HLV added its property through
management contract in Gurgaon (Haryana). Delhi and Chennai property are expected to
become operational in FY11 and FY12, respectively.
Investment Theme
HLV currently is the most expensive stock available in the hotel industry space and is
trading at almost 50%-60% premium to other bigger players. The heavy investment
made by the company in the Delhi property is weighing heavily on the company. With
the shifting of airport from the city to the outskirts in Bangalore, the super-normal profit
generations from the Bangalore property are no longer available. To take care of the
high debt on books, the company plans to raise money through QIB/FCCB.
Key Risks
Better than expected improvement in the Bengaluru ARRs, sale of land bank and sale of
Chennai general office space are some of the risks to our estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
HOTEL LEELA VENTURE
Disappointing numbers; stress test from Q1FY12
Impressive jump in ARRs
Hotel Leela Venture’s (HLV) Q3FY11 sales jumped 11.4% Y-o-Y and 34.7% Q-o-Q,
to INR 1.42 bn, driven by 13% Y-o-Y and 35% Q-o-Q growth in ARRs, to INR
11,149 in Q3FY11 The company reported 69.7% ORs versus 69.2% in Q3FY10
and 61.6% in Q2FY11. Growth in HLV’s ARRs is amongst the best among all hotel
companies in India, this quarter. The Delhi property opening has now been
postponed to Q1FY12 against the previous expectation of Q4FY11.
EBIDTA margins improved; PAT affected due to high interest
EBIDTA margin improved Q-o-Q by 1600bps due to high operating leverage (35%
sequential increase in ARRs). Y-o-Y, EBIDTA margins were flat. We expect EBIDTA
margin to improve to 33.7% in FY11E against 29% in FY10. Owing to the
conversion of FCCB debt into Indian currency debt in H1FY11, interest costs
increased 322% Y-o-Y and 33% Q-o-Q. As a result, the company reported PAT
margins of 15% against 23% in Q3FY10. With the expected opening of Delhi
property in Q1FY12, we expect the P&L to come under severe pressure as
depreciation and interest on the INR 17 bn capex on the Delhi property starts
reflecting Q1FY12 onwards.
Due to the shifting of Delhi property to Q1FY12 than our earlier estimates of
Q4FY11, we are reducing our FY11E sales estimates by 10% and EBIDTA
estimates by 22%. But due to the shifting of interest charges to FY12, we increase
our PAT estimates for FY11E by 40%. Due to the higher than expected capex for
the Delhi property and the subsequent increased debt, we are also reducing our
FY12E PAT by 30-35%. But as all the changes are happening below the operating
profit, our valuations remain intact for the company.
Outlook and valuations: Expensive on all counts; maintain ‘REDUCE’
With the substantial rise in debt due to the ongoing capex and redemption of
FCCB debt, we expect the company to raise either equity or sell the office space in
Chennai in some time. We expect the company’s interest liability to rise
substantially from Q1FY12 as interest and depreciation charges of the Delhi
property (INR 17 bn) start hitting the P&L. With the FY11E D/E of 4.4x, we believe
that the company’s balance sheet is severely stretched. We continue to value HLV
based on EV/EBIDTA and maintain our target price of INR 25. At CMP of INR 38.7,
the stock is trading at 32.6x and 17.2x EV/EBIDTA of FY11E and
Company Description
Hotel Leela Venture (HLV), a chain of luxury resorts and business hotels, operates 1,617
rooms across six locations in India. Five properties with 1,205 rooms are owned by the
company and 409 rooms are under the management contract. Compared with other
hotel chains in India, HLV is small, but has presence across prominent cities where it
operates.
HLV has a marketing alliance with Kempinski for its properties in India. The company
caters to both business and leisure travelers. In 2009, HLV added its property through
management contract in Gurgaon (Haryana). Delhi and Chennai property are expected to
become operational in FY11 and FY12, respectively.
Investment Theme
HLV currently is the most expensive stock available in the hotel industry space and is
trading at almost 50%-60% premium to other bigger players. The heavy investment
made by the company in the Delhi property is weighing heavily on the company. With
the shifting of airport from the city to the outskirts in Bangalore, the super-normal profit
generations from the Bangalore property are no longer available. To take care of the
high debt on books, the company plans to raise money through QIB/FCCB.
Key Risks
Better than expected improvement in the Bengaluru ARRs, sale of land bank and sale of
Chennai general office space are some of the risks to our estimates.
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